20 October 2010

Government bailout turns a profit

The U.S. government’s bailout of financial firms through the Troubled Asset Relief Program provided taxpayers with higher returns than they could have made buying 30-year Treasury bonds

I'll be honest; my first reaction to this was, "Oh no, I'm going to be forced to admit that the government did something right". Indeed, according to the article, the government invested $309 billion in Wall Street bailouts via the so-called TARP program, of which, about $200 billion has been repaid. Not only that, though. The government has also earned $25 billion on its investment. What's not to like?

How about the fact that the bailouts didn't actually work? Unemployment actually skyrocketed while the government was supposedly making this profit. These unemployment numbers are "official" ones, by the way. "Real" unemployment is actually nearly twice as high, and even that number doesn't paint a totally accurate picture of the economy. It fails to account for falling wages, part time workers who had and/or want full time work, and those who simply are no longer looking.

Here's the real reason to be upset about the bailout, though, and Bloomberg, to its credit, points it out.

One of those subsidies [to the banks] is the $350 billion that savers forgo each year because the Fed keeps interest rates near zero, according to Petzel’s calculations. While banks can borrow at close to zero from the Fed, they lend to consumers and corporations at almost 5 percent, or to the Treasury at 2.5 percent, and they get to keep the difference.

Take a second to do the math. The American taxpayers have given up over $700 billion (so far). That is more than double what the government originally invested and gained via that investment. So, we have the taxpayers, the government, and the banks. Government comes out $25 billion ahead. Banks come out $700 billion ahead. (This is debatable since the banks also took losses. However, those losses are mitigated by this $700 billion). Taxpayers come out $700 billion behind plus the wrecked economy.

It doesn't end there, though.

According to Prins’s tally, the money plowed into the financial system to prop it up peaked at $19.4 trillion. Banks have benefited from that cash, which helped keep prices of mortgage securities, house prices and other assets overvalued, Prins said in an interview. Even though some of the support has been withdrawn, part of it will likely be lost, such as the hundreds of billions of dollars put into Fannie Mae and Freddie Mac, she said.

"These are all indirect subsidies the banks got," Prins said. "So the TARP gains touted by the Treasury are only true if you ignore all the other costs."

Keep these other costs in mind the next time someone tries to tell you that the bailouts worked or that the government (and supposedly, by extension, the taxpayers) actually made money on the deal.